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PEAKING OF WORLD OIL PRODUCTION:

IMPACTS, MITIGATION,

RISK MANAGEMENT

Robert L. Hirsch, SAICRoger Bezdek, MISI

Robert Wendling, MISI

May 2005

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The Situation• THE PROBLEM: Soon world conventional oil production will no longer

meet demand.

• WHY THE PROBLEM?– World conventional oil resources are finite.– Oil discovery has lagged consumption for two decades; the resource

is being rapidly depleted.

• WHEN WILL PEAKING OCCUR? – No one knows for sure.– Some think 1-10 years.

• WHY CAN’T THE PROBLEM BE FIXED QUICKLY?– The scale of consumption worldwide is enormous.– Mitigation will take a decade or more, based on crash programs.– With timely mitigation, dire economic consequences can be avoided.

Peaking = The world’s first forced energy transition.

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• THE PROBLEM

• LEARNING FROM EXPERIENCE

• TRANSPORTATION FLEET LIFETIMES

• MITIGATION OPTIONS

• THREE MITIGATION SCENARIOS

• PRUDENT RISK MANAGEMENT

THIS PRESENTATION

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• Oil is the lifeblood of modern civilization, esp. transportation.

• Geologists agree: World conventional oil production will peak.

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FUNDAMENTALS

Time - Decades

Prod

uctio

n

Peak

Reserves

1945 2000Year

Notional Individual Reservoir

U.S Lower 48 StatesHundreds of Reservoirs

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FUNDAMENTALS

Peaking is maximum production, not running out.

It’s a liquid fuels problem.

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• World oil demand is huge & growing.

• Most past peaking predictions were wrong.+ Hubbert was right on the U.S. Lower 48

+ Recent predictions may be right.

+ Wrong isn’t forever.

• Why reconsider peaking now?

- World oil consumption outstripping new discoveries

- Extensive drilling worldwide - Large database

- Advanced technology: Modern geology & 3D seismic

- Many experts are pessimistic.

- The economic consequences could be dire.

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OBSERVATIONS

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ANNUAL WORLD OIL BALANCE IS NEGATIVE*

0

-20

20

40

1940 2000Year

Billions of Barrels

* Reserves additions minus consumption

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FORECASTS OF WORLD CONVENTIONAL OIL PRODUCTION PEAKING(Not all of the latest forecasts)

Projection Source

2006-2007 Bakhitari, A.M.S.

2007-2009 Simmons, M.R.

After 2007 Skrebowski, C.

2008 Campbell / ASPO

Before 2009 Deffeyes, K.S.

Before 2010 Goodstein, D.

After 2010 World Energy Council

2010-2020 Laherrere, J.

2016 EIA nominal case

After 2020 CERA

2025 or later Shell----------------------------------------------------------------No visible peak Lynch, M.C.

2000

2010

2020

2030

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LIKELY TRENDS NEAR WORLD OIL PEAKING

2. Demand -(Healthy World

Economy)

1.Production(Peaks)

3. Oil Price

A LIQUID FUELS PROBLEM

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• North American natural gas

• U.S. Lower 48 states oil production

• Economic impacts in 1973 & 1979

LEARNING FROM EXPERIENCE

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EXPERIENCE: NORTH AMERICAN NATURAL GAS

• Experts overestimated North American natural gas reserves & future production as late as 2001.

– National Petroleum Council - 1999– DOE EIA - 1999– Cambridge Energy Research Associates - 2001

• U.S. natural gas production is now flat / in decline.

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• Natural gas & oil geology have similarities.• If wrong on natural gas, what’s the risk on oil?

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EXPERIENCE:Oil PRICE SPIKES CAUSED SOME U.S. RECESSIONS

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

0

10

20

30

40

50

60

70

80

Recession

OIL PRICE

(2003 $ per

barrel)

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Over 30 years, four recessions followed oil price spikes.

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EXPERIENCE: MAJOR OIL INTERRUPTIONS

• Impacts of world oil production peaking are exemplified by the1973 & 1979 oil interruptions.

+ Inflation + Recession + Unemployment + High interest rates

• 1973 & 1979 were relatively brief.

• World oil peaking impacts could last a decade or more.

The world has never faced a problem like oil peaking.

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EXPERIENCE: U. S. LOWER 48 OIL PRODUCTION

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

80

0

Production

Price

Dramatic Improvement in Oil

Field Technology

PRODUCTION(Billions of Barrels per

Year)

1950 1960 1970 1980 1990 2000

High prices & advanced technology did not reverse trends!

PRICE(2003 $ per

barrels)

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U.S. OIL USE

• U.S. 2003 consumption: ~20 MM bpd~25% of world oil demand~Two thirds used in transportation

• The U.S. transportation fleet+ Very large + Huge investment+ Evolves slowly

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Details

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Fleet Size Median Cost to Replace Lifetime Half the Fleet(Years) (2003 $)

Automobiles 130 million 17 $1.3 trillion

Light Trucks, 80 million 16 $1 trillionSUVs,etc.

Heavy Trucks, 7 million 28 $1.5 trillionBuses, etc.

Aircraft 8,500 22 $.25 trillion

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U.S. TRANSPORTATION FLEETS

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TRANSPORTATION EQUIPMENT CHANGES

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• Large efficiency improvements possible in some fleets, smaller in others.

• Some fuel switching possible in the short term, more longer term.

Change is slow & expensive.

Fuel must be provided for existing fleets.

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THREE MITIGATION SCENARIOS

• Scenario I - No action until peaking occurs

• Scenario II - Mitigation started 10 years before peaking

• Scenario III - Mitigation started 20 years before peaking

Assumptions:

» All mitigation initiated immediately

» Crash program implementation

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Optimistic limiting case

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MITIGATION OPTIONS

Commercial or near-commercial technologies to impact LIQUID FUEL MARKETS

Vehicle Fuel Efficiency

Gas-To-Liquids (GTL)

Heavy Oil / Oil Sands

Coal Liquefaction

Enhanced Oil Recovery (EOR)

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OPTIONS NOT INCLUDED

Option Reasoning

– Nuclear

– Wind ………... ELECTRIC / NOT LIQUID FUELS

– Solar

– Hydrogen……………Neither ready nor economic

– Biomass……………. Not economic

– Shale Oil……………. Not commercial

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VEHICLE FUEL EFFICIENCY

• Automobiles & light trucks (LDVs) are the largest liquid fuel consuming opportunity. – Diesel engines are up to 30% more efficient than gasoline engines.– Hybrids are 40% more efficient in small cars / 80% in medium cars.– Enhancements to existing technologies can also contribute.

Estimates based on 30%, then 50% improvements

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MITIGATION OPTIONS & ISSUES - I

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GAS-TO-LIQUIDS

• Now commercial & could be significant • Must compete with LNG• Non-U.S. resource

Estimates based on 2x recent GTL projections

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MITIGATION OPTIONS & ISSUES - II

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HEAVY OIL / OIL SANDS

• Canada + Venezuela: 3-4 trillion barrels• ~600 billion barrels economic• Only part clean fuels - Canada: 0.6 of 1.0 MM bpd• Current plans - Canada: 3 MM bpd synthetic oil by 2030 • Large energy input required• Oils harder to refine• Significant environmental problems

Estimates based on 2-2.5x recent projections.

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MITIGATION OPTIONS & ISSUES - III

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COAL-TO-LIQUIDS

• Now commercial / near-commercial.• Cost: $30-35/bbl• Huge coal resource in U.S., elsewhere• Liquids don’t need refining

Based on five new 100,000 bpd production plants/year.

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MITIGATION OPTIONS & ISSUES - IV

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ENHANCED OIL RECOVERY

• EOR has been utilized for decades.

• It’s usually applied after primary and secondary recovery.

• It helps recover additional oil from reservoirs past peak production.

Production estimates paced by CO2 availability.

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MITIGATION OPTIONS & ISSUES - V

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WEDGES USED TO SHOW MITIGATION

Prepare Produce

ImpactBarrels/ Day

0 10 20 30

ActualVehicle Fleet Fuel

Saved Wedge Approximation

Time - YearsSAIC / MISI

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WEDGES VALUES IN THIS STUDY

Preparation Impact 10 YearsDelay Later

Mitigation Option (Years) (MM bpd)

– Vehicle Efficiency 3 2

– Gas-To-Liquids 3 2

– Heavy Oils / Oil Sands 3 8

– Coal Liquids 4 5

– Enhanced Oil Recovery 5 3

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Potential contributions vary.

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0 5 10 15

10

0

20

30

Years After Crash Program Initiation

Impact(MM bpd)

EOR

Coal Liquids

Heavy Oil

GTLEff. Vehicles

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SUM OF WEDGES

• Delay, then rapid growth.

• Roughly 25 MM bpd at 15 years after crash program start.

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U.S. LOWER-48 OIL PRODUCTION PEAKED & DECLINED

3.5

3.02.5

2.0

1.51.00.5

0

Actual (EIA)

Approximation

1950 1960 1970 1980 1990 2000

Year

Production(Billions of

Barrels per Year)

A huge, complex & geologically varied oil province.

Used as a surrogate for the world.

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0

20

40

60

80

100

-20 -10 0 +10 +20

YEARS BEFORE / AFTER OIL PEAK

PRODUCTION (MM bpd)

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Assumed:

• Demand @ 2%

• Oil Decline @ 2%

• Peak @ 100 MM bpd(Not a prediction)

Extrapolated Demand -Growing World Economy

WORLD OIL SUPPLY & DEMAND:LOWER 48 PRODUCTION PATTERN & EXTRAPOLATED DEMAND GROWTH

Shortage

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L 48 production pattern

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0

20

40

60

80

100

-20 -10 0 +10 +20

120

YEARS BEFORE / AFTER OIL PEAK

PRODUCTION(MM bpd)

SCENARIO I: MITIGATION @ PEAKING

Mitigation

Shortage

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0

20

40

60

80

100

-20 -10 0 +10 +20

120

YEARS BEFORE / AFTER OIL PEAK

PRODUCTION(MM bpd)

SCENARIO II: MITIGATION 10 YEARS BEFORE

Mitigation

Shortage

Oil Decline Delayed

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Start

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0

20

40

60

80

100

-20 -10 0 +10 +20

120

YEARS BEFORE / AFTER OIL PEAK

PRODUCTION(MM bpd)

SCENARIO II: MITIGATION 20 YEARS BEFORE

Mitigation

Oil Peaking Further Delayed

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Start

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I. Wait for peaking

II. Start 10 years early

III. Start 20 years early

SCENARIOS ANALYSIS CONCLUSIONSBasis: Immediate crash program mitigation

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Oil shortages largest, longest lasting

Delays peaking; still shortages

Avoids the problem; smooth transition

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RAPID OIL PRODUCTION DECLINES AFTER PEAKING HAVE BEEN FORECAST

EIA (Hakes, J.) ……………………………..… ~ 8%

Saudi Aramco (Al-Husseini, S)…………….. 3-5%

ExxonMobil………………………………..... 4-6%

On a base of 100 MM bpd, 3-8% declines correspond to 3-8 MM bpd annual declines

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Mitigation would be much more difficult!

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WORLD OIL PEAKING FORECASTS

Projection Source

2006-2007 Bakhitari, A.M.S.

2007-2009 Simmons, M.R.

After 2007 Skrebowski, C.

Before 2009 Deffeyes, K.S.

Before 2010 Goodstein, D.

Around 2010 Campbell, C.J.

After 2010 World Energy Council

2010-2020 Laherrere, J.

2016 EIA nominal case

After 2020 CERA

2025 or later Shell

No visible peak Lynch, M.C.

2000

2010

2020

2030

Now

Now + 10

Now + 20

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• Skilled workers & industrial capacity worldwide are in short supply for the level of effort described herein.

• Massive commercial crash programs are rare. Startup will almost certainly be much slower than assumed in this analysis.

• Some countries may delay, others will proceed rapidly with mitigation. China may have started (Canada, Venezuela).

• It is not clear how environmental protection will fare if there is widespread joblessness, high inflation & severe recession.

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SOME ISSUES

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Time

Cost of

Error

PRUDENT RISK MANAGEMENT

Premature Start

0 Years Scenario I

- 10 Years Scenario II

- 20 Years Scenario III

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Oil peaking timing is uncertain. • It may be soon.• “Soon” is less that 20 years hence.

The world’s first forced energy transition.

It’s a world liquid fuels problem.

A number of mitigation technologies are ready.

With timely mitigation, economic damage minimized.

Prudent risk management = Early action, not reaction after the fact.

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SUMMARY & CONCLUSIONS

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Backup Slides

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Oil Production & Reserves

• The total producible oil in a field = reserves.

• Reserves are estimated & re-estimated over the life of a field.

+ Reserve estimation is often influenced by politics.

• Peak production occurs after roughly half is produced.

Time - Decades

Prod

uctio

nPeak

Reserves

In all oil fields, production increases to a peak & then

declines.

Reserves do not foretell when oil peaking will occur.

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Some Facts

• World’s last Super Giant oil fields found in the 1960s.

• From 1996-1999, >$400 billion in E & P only kept production flat.

• In mid 1980s, OPEC production quotas became partly based on “reserves.”

+ From 1986 to 1990 “reserves” increased by ~300 Gb+ Only ~10 Gb were actually discovered.+ Games then / honest now?

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0

20

40

60

80

100

-20 -10 0 +10 +20

120

YEARS BEFORE / AFTER OIL PEAK

PRODUCTION(MM bpd)

Supply & Demand = 2%

Oil Decline = 2%

Peaking Assumed at 100 MM bpd

Extrapolated Demand

LOOK AGAIN AT THE SHORTFALL

The “shortage”

after 20 years could be 80%

of today’s world oil

consumption65 / 82 ~ 80%

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"...it's tempting just to let the brain shut down in denial over something too scary to contemplate and just hope for the best.”

Williams, B. Shrinking OPEC Cushion Bodes Scary Surprises.

OGJ. June 14, 2004.

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